Question

When consulting with small business clients who are challenged with controlling cost to maximize profits about achieving their desired profit goals, I share with them that achieving profitability goes beyond basic accounting and management of books. One strategy I share with them is working with a budget to control their cost, you know, keeping an eye on cash. Based on your reading and/or experience with budgets in the workplace, how are budgets used by management to control operations?

Answer 1

Management uses budgets to know how the business is actually running, whether actual costs are incurring less than the estimated costs for certain period, whether actual revenues are earning more than the estimated revenues for a particular period etc. To have control on all the important factors in the regular operations, the management maintains and closely monitors different budgets.

For example, a cash budget is maintained and under the control of the management whether all cash receipts that are actually received are correctly recorded in the cash budget and all the cash payments are correctly recorded without showing more cash payments than the actual cash payments which are paid.

Similarly, a material purchase budget is maintained and under the control of the management whether it is correctly recorded all the materials that actually purchased and used during the production of the final product and a production budget is to know whether all the finished goods, work-in process etc are correctly recorded as per the actual usage.

In this way, a different set of budgets are used by the management to control its operations and also to know, how much the production or the business is improved compared with estimates of a certain period and with a comparison with previous periods.

Therefore, maintaining the different budgets to control the entire operations and business are essential for management for better results.